Want to take it to the next level in your company. It might be time to finance BIMBO. Todd O’Neil explains.
For both business buyers and management teams alike, the BIMBO — Buy In, Management Buy Out — is an excellent way to achieve their goals of owning a sizable business with a committed team.
Many potential business purchasers are limited at the size of the business they are seeking by their existing capital and skills. Equally, there are often large businesses with excellent management teams that are not given the opportunity to buy the businesses they currently run. Regrettably, this means that the business owner does not necessarily receive the best price from the best people for an asset they may have lovingly built over decades.
The answer to this problem is the BIMBO.
A buyer looking to buy a business partners with the existing management team to buy out the current owner.
This powerful combination of money plus experience usually means a higher degree of leveraging (finance) being available and a better price for the owner. In most cases, equity (cash) is contributed by both the business buyer and the management team, and any bank loans are raised together. This utilises the assets and income of every part of the team and shows the bank that the entire business is aligned to achieving profitability goals.
A better price for the owner
Management teams can often identify opportunities for business growth and expense cutting that the current long-term owners either ignore or don’t see. (Don’t we all think we could do a better job if only we were running the place?) For this reason a BIMBO team may be prepared to pay more for the business than a competitor or external purchaser that is weighing up the risks of taking on an unknown business and team while trying to screw down the price to save as much money as possible.
One under-utilised technique in many business purchases is that of Deferred Consideration. Deferred Consideration particularly suits a BIMBO. It simply means that the current owner defers full payment of the purchase price until a later date. For example, they may elect to be paid 30 percent of the purchase price over a three-year term from the cashflows of the business, rather than taking the payment upfront.
In the past, many business sellers would be advised by their lawyers that this type of structure puts them at risk of not receiving their money should the business fail after the transaction takes place. Now there is the option of an insurance policy to protect the vendor for any shortfall they experience. Given the cash payout nature of the policy, it could be deemed safer than taking mortgages over property.
Example of a BIMBO Increasing Business Purchase Size
|Equity – Business Buyer||$ 600,000||$ 600,000|
|Equity – Management Team||$ 0||$ 300,000|
|Deferred Consideration 34%||$ 0||$1,200,000|
|Bank Finance 40%||$ 400,000||$1,400,000|
Combination of Deferred Consideration and BIMBO allows a purchaser with $600,000 to purchase a business for 3.5 times the price of one they may be considering.
Related reading:8 steps to buy out the boss
Todd O’Neill is Managing Director of The Mardent Group, an Australian finance broking company that specialises in helping people buy businesses. Previously he worked for one of Australia’s big four banks and in the UK and Europe for high profile firms Accenture and The Industrial Bank of Japan.